What is Churn?

Feels like a new word that was introduced to the online business community. This word has been around for ages and it’s one of the most important KPIs and benchmarks of a business to validate its growth potential, market valuation, and health of the business and its products and services.

So if you’re in this entrepreneurial journey for the long term and you want an Ethical business that’s sustainable let’s embark on this journey together.

Long story short, churn will prevent your clients from fully benefiting from what you have to offer, killing any potential opportunities for retaining them, cross-selling, upselling, and creating true raving fans (advocacy).

How can you define churn?

The concept is quite simple, it refers to the rate at which your customers discontinue the use of a product or service during a specific period of time.

For some businesses, it can be the inverse metric of customer retention, normally for a subscription-based business (membership offers or SaaS are great examples).

Both churn and retention can be used to estimate your Client’s Lifetime Value, and that’s the most critical number you need to know to understand how much you can afford to pay to get a new client in the door, while still being profitable.

For online service-based businesses, like Coaches, Agencies, and Consultants, the definition of churn is a bit blurry and because there is not a “one size fits all”, let me first give you the general definition of how it’s calculated:

At the beginning of a period, if you had 100 customers, and at the end of that period you only had 98 left, your churn rate is 2% (lost 2 out of 100).

But in the online service space things are not as easy as that. Why?

Because some of the offers are not a subscription model, they have a contract duration (typically something between 8 weeks and 6 months), and the clients might pay upfront or choose a payment plan.

So the formula would be:

Churn rate = the number of customers lost in the period / the number of customers at the start of the period.

The challenge in our space is that people tend to think that customers lost are just “refunds”. And they get overly optimistic.

Or they add all the clients they “lost” including the ones that paid on time and finished their contract.

Both approaches can make the measurements inaccurate. So what we recommend to our clients is a simple variation:

Churn rate = the number of customers lost in the period (refund, contract cancellation, chargeback) / the number of customers at the start of the period.

As you can see we don’t count new clients added that month to keep the measurement accurate.

Of course, for churn, there is no right or wrong. Ideally, you should include the average cash not collected for the lost customers (because their LTV might have a more relevant impact), and other things such as how long they were with you before they left.

But for the sake of simplicity, let’s stick to the simple formula above. It works.

Also, the goal would be to measure the delta (delta is the variation month over month) month over month to measure how your initiatives improve or don’t improve the existing churn numbers.

What are some common types of churn?

There are plenty of them… we could spend all day doing this. What we will do instead is focus on the most common ones in the online space for Coaches, Consultants, and Agencies.

Your client doesn’t use your service: There is no emotional investment and no perception of value. If they’re not engaged they’re at risk of churning.
Your client has no resources available: Depending on your offer, resources could be: time, money, or energy. If your customer shows signs of lacking any of those they’re at risk of churning.
Your client sees little or no progress: After a few weeks, they feel like they’re not making tons of progress and they go through what we call the “valley of disappointment”. This will trigger hopelessness and will put them at risk of churning.
The client feels unseen and unheard: When clients get stuck, if you don’t have the right support system in place they will feel neglected. It can be a slow buildup process or an overnight shift and it needs to be addressed or the client will churn.
Your client feels stuck: Your journey will be full of peaks and valleys, it’s never going to feel like a straight line. Knowing what the most common inflection points are will help you be aware of a client who’s at risk.
The client is unresponsive: Have you ever used the word “my client is ghosting me”, or the client is “MIA”? It means that the client hasn’t been engaged. This client is definitely at risk of churning.
Unsuitable client: Sales teams have challenging sales targets and sometimes they might get a suboptimal client to buy. The main problem, and what puts this client at risk of churning, is that they won’t get the actual value from what you offer.
The loss of a Coach/CSM/AM: When you lose one of your key players, chances are that the clients working with that key player will churn.
Challenging Clients: Not all clients are challenging, but a lot of them are. And in order for you to drive full adoption of what you offer, clients will need to change. The resistance to change, perceived as massive friction for the client will make adoption difficult and that will put the client at risk of churning.
Black Swans and Unexpected Events: Your clients might have the best intentions and have some real goals they want to accomplish. But sometimes stuff happens and those Black Swan events can completely derail that client and put them at risk of churning. Medical or Health problems, the loss of a loved one, or losing a source of revenue are just a few examples. (even the pandemic which is more of an authentic Black Crazy Swan!)